Resurgent gold miners likely to favour brownfield acquisitions

WITH a soaring gold price and no further pressures to cut costs, gold companies are diving into merger and acquisition opportunities to try to compete with global rivals, but it is at this point in the cycle that they should ensure they do not repeat the mistakes of the past.

The past decade has been one of the worst periods for mining companies, which have had to cut costs and lay off workers as commodity prices dropped due to reduced demand from China.

Mining companies also destroyed value by undertaking big capital projects that could not deliver returns to shareholders.

As commodity prices dropped, they sat with billions in debt and depressed shares.

Pan African Resources CEO Cobus Loots said that was why embarking on brownfield projects, in which companies revive old mines, was the best option.

“It’s always easier to expand something that you know and is close to your existing operation versus going to something that is completely new and unknown — generally in mining the surprises you get are unpleasant,” Loots said on Wednesday at the company’s annual results presentation.

Pan African, which acquired Evander Gold Mines in Mpumalanga from Harmony in 2013, is reaping the rewards of this brownfield project this year as the bullion price increased by 24% and the rand dropped to record lows of R16.87/$ in January. The company’s earnings increased by 163% in its 2016 financial results released this week.

Greenfield projects could have great benefits but were risky as they tended to take years to get off the ground and by that time operational costs could have risen and metal prices dropped. This resulted in large impairments.

Although Loots said there were fewer risks in brownfield projects, the mines were old and management had to have a welldeveloped turnaround strategy to revive a loss-making asset.

“When we bought Evander, it was also for the tailings projects. There are also a lot of pluses, the infrastructure that South Africa has invested in mining in all the years — you can’t do that again. It makes sense to take something that is operating where you have a lot of capital [already invested] and say: ‘How do we best optimise this operation?’ ”

Barberton Mines, also in Mpumalanga, is another of Pan African’s brownfield mines, producing gold at $330/oz.

This week, Harmony Gold, which aims to produce 1.5 million ounces of gold in the next three years, acquired the other 50% of its loss-making Hidden Valley mine in Papua New Guinea from its partner Newcrest Mining for $1 (about R13.60). The company said Hidden Valley had the potential to yield 180 000 ounces a year.

Izak van Niekerk, an analyst at Mergence Investment Managers, said Harmony knew the operation and the price was favourable. “If they buy a lossmaking mine, then they should have some change that they want to implement.”

AngloGold Ashanti, which was still dealing with its brownfield project, the Obuasi mine in Ghana, had to cut capital expenditure due to the risk of illegal miners invading the area. The company did not declare a dividend in its half-year results.

Gold Fields, which declared a 50c/share dividend and is looking for merger and acquisition opportunities, said South Africa was a no-go area for it, but Australia and Canada were good places to look.

Sibanye which had made a success in turning around the loss making assets from Gold Fields’ unbundling declared a dividend of 85c/share.

Harmony declared an 80c/share dividend and said it was searching for acquisition opportunities in Africa and Papua New Guinea.

Pan African, which declared its highest dividend to date of about R300-million, or 15.4c/ share, said any acquisitions would be in the gold sector.

Loots said: “Our shareholders want to see us continue being a gold company.”

It’s always easier to expand something that you know